Friday, February 5, 2016

As I have done every year
since I started this blog, I want to give you a summary of the 2016
edition of Demographia's International Housing Affordability Survey.
From my perspective, this is one of the most interesting analyses of
housing affordability because affordability is measured in terms that we can
all relate to; our household income. In this posting, I want to take a
look at the most and least affordable housing markets in the United States when
the median house price in a given market is measured using the median household
income in that same market. In total, Demographia examines the
affordability of housing in 367 markets in nine nations including Australia,
Canada, China (Hong Kong), Ireland, Japan, New Zealand, Singapore, the United
Kingdom and the United States.

Demographia rates housing
market affordability using the concept of "median multiple" which is
simply the following:

Median Multiple = Median
Price of a Home

Median Household Income

The affordability rating
is defined as follows:

Median Multiple of 3.0 or
less - Affordable

Median Multiple of 3.1 to
4.0 - Moderately Unaffordable

Median Multiple of 4.1 to
5.0 - Seriously Unaffordable

Median Multiple of 5.0 or
more - Severely Unaffordable

Historically speaking,
housing markets in Australia, Canada, Ireland, New Zealand, the United Kingdom
and the United States have been remarkably consistent with median house prices
ranging from 2.0 to 3.0 times median household income. Housing markets
with a median multiple of 3.0 or less are generally considered sustainable
since a median family can easily afford to make the mortgage payments on a
house that is considered affordable. However, in recent years, housing in
some markets has decoupled from income levels with housing prices rising at
rates that are far in excess of the rate of increase in family income.

To help us put housing affordability in the United States into perspective, here is a table showing
the housing affordability ratings by nation for all nine nations in the study,
showing us how some nations (particularly Australia, Canada, New Zealand and
the United Kingdom) have a significant number of either seriously or severely
unaffordable real estate markets:

Now, let's concentrate on
affordability in the United States housing market. Here is the summary
for affordability in America's major metropolitan markets (population over 1
million):

Affordable - 13 markets
(24.5 percent)

Moderately Unaffordable -
24 markets (45.3 percent)

Seriously Unaffordable -
5 markets (9.4 percent)

Severely Unaffordable -
11 markets (20.8 percent)

Median Multiple - 3.7

Here is the summary for
all United States markets:

Affordable - 75 markets
(32.5 percent)

Moderately Unaffordable -
90 markets (39 percent)

Seriously Unaffordable -
37 markets (16 percent)

Severely Unaffordable -
29 markets (12.6 percent)

Median Multiple - 3.5

As we can see, in both
major and smaller markets, housing affordability in the United States is, once
again, becoming problematic. When we go back to data from 2007 when the housing bubble was about to burst,
Demographia calculated at median multiple of 3.6 for all markets, just above
the current level. At that time, 35.7 percent of all U.S. housing markets
were considered affordable compared to 32.5 percent now. If we go to
Demographia's 2009 report, the median multiple for all U.S. housing markets had
fallen to 3.2 and 44 percent of all markets were considered affordable,
substantially higher than the level is currently.

Now, let's look at the
top ten most affordable housing markets in the United States:

As has been the case in
the past, the majority of America's most affordable housing markets are located
in the de-industrialized belt. It is also interesting to see that in
eight out of ten markets, affordability has improved on a year-over-year basis.

Here are the top ten
least affordable housing markets in the United States:

As you can see, America's
most severely unaffordable housing markets are located exclusively in
California and Hawaii, the sun and sand (or earthquake and volcanic activity)
states. In all markets other than San Diego, housing affordability has
declined on a year-over-year basis. In fact, the situation in California
is worse than my table shows; there are seven additional markets in California
that are considered severely unaffordable.

Let's close this posting
with a graphic that shows the pre-bubble and 2015 housing affordability for
America's severely unaffordable markets:

It is quite clear that,
despite the collapsing of the real estate bubble during the Great Recession,
some of America's largest real estate markets have become increasingly
unaffordable by a median family with house prices approximately 75 percent
higher relative to income than they were before the real estate bubble formed.
Obviously, California's real estate valuations are increasingly
problematic. While this could be dismissed as a single state issue, with
California having, by a wide margin, the largest gross state product in the
United States, any significant drop in its real estate prices could have a
significant impact on the national economy.

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About Me

I have been an avid follower of the world's political and economic scene since the great gold rush of 1979 - 1980 when it seemed that the world's economic system was on the verge of collapse. I am most concerned about the mounting level of government debt and the lack of political will to solve the problem. Actions need to be taken sooner rather than later when demographic issues will make solutions far more difficult. As a geoscientist, I am also concerned about the world's energy future; as we reach peak cheap oil, we need to find viable long-term solutions to what will ultimately become a supply-demand imbalance.